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Raghuram Rajan, India’s central banking czar, will be history by September 2016. He enjoys unprecedented popularity and near cult status as Governor of the Reserve Bank of India. Some of this has to do with his youthful looks and fresh demeanor — unusual in a profession peopled by dour old men. But much of his appeal is related to the confidence and skill he brings to the job, which he plunged into in weeks, rather than the months, which are the usual learning curve.

Even business — usually taciturn about rooting for bureaucrats, has also publicly supported his conservative strategy to keep the rupee stable; build foreign reserves; check inflation and ensure reasonable positive real interest rates, to protect the large mass of middle-class savers. International capital flows, which are as much about fundamentals as about the Iqbal — the credibility and charisma — of the central bank, responded well to his strategy for stability with fundamental reform.

Job specific technical brilliance and international standing matters

Rajan is the first RBI governor to came to the job with considerable experience in international finance (in the IMF) and even more significantly, a long spell in American academia, in the same area. To the billionaires who make the markets move, Rajan is a familiar face, with a track record of original thinking and practical foresight. He is best known for disagreeing with mainstream economists and foretelling the 2008 financial meltdown.

Rajan’s exquisite symphony- the “Dardnama” (book of pain)

In India, his legacy is the exquisite symphony, he wrote, of caution mixed with big-bang reforms. On interest rates, he was consistently cautious. His mantra was that flooding the economy with cheap money is not a quick-fix for growth. Instead, it can spark off high inflation, as in Brazil.

To the common man, this resonates well with the millennium’s continuing conundrum of jobless, inequitable, high growth. There are no quick fixes for these flaws in today’s post-industrial, service-oriented growth model. Rajan had no choice except to focus on keeping inflation low; preserving the real incomes of the disadvantaged who don’t have the luxury of inflation-indexed incomes and pushing banks and industry hard to become competitive.

His historic big reform was break with the past and publicly finger banks that had lent inefficiently, destroyed capital and most likely enhanced corruption — given the magnitude of bad loans accumulated by them since 2011.

He shone a bright light on the dodgy bank loans overburden- shockingly high at more than 12% of bank assets and 4% of GDP, rather than keeping them hidden under furtive, refinance Ponzi schemes. He was likened by “incremental reformers” to a bull in a china shop — pulling down both fraudsters and unlucky entrepreneurs with equal ferocity.

Admittedly, big-bang reforms shake up the cozy status quo and inflicts pain. But if followed through with decisive surgery, as Rajan recommended, it could have created sustainable wealth, in the medium term, rather than slowly bleed the financial system till it collapses, as happened in the developed world in 2008.

“Big bang” reforms too disruptive for India’s political economy

Will there ever be another Rajan as RBI governor? More importantly do we need another Rajan, given our political economy?

India is a conflicted society — at once eulogizing “savants” like Rajan, and yet shrinking away from the ripples they create in the village pond. It takes a lifetime of work in India to play the system harmoniously. Rajan came before India was ready for him. So while we may not be able to digest a Rajan today, there is unlikely to be a shortage of “suitable” talent. But the real pity is — why have we tried to “fix” a system that is not broken. Why not let the good work continue?

Tough global headwinds for the new Governor

Grapic credit: janeaustenslondon.com

The irony is that by letting Rajan go in September this year, the government will actually be cementing his “rock star” legacy. The second half of 2016 is blighted by uncertainty and will be hell for the new governor. First, is the near-term question mark over Brexit on June 23. If the “Leavers” win, Europe is surely in for turbulent times. But this may not actually happen, as the British are far too practical to be brash and emotional.

Second, even without a Brexit, the economic outlook is gloomy. Protectionism is growing and geopolitical instability is getting worse. These are fertile grounds for a flight of capital to safety and away from emerging markets like India. A tightening by the US Federal Reserve in the second half of this year may convert the capital flight into an outward-bound tsunami, severely denting our foreign exchange reserves and importing instability.

The only good news is that oil prices are likely to remain low. The low lead time for the mothballed 500-odd oil fracking rigs in the United States to return to work ensures that any uptick in price beyond $50 will deliver a supply response. Saudi Arabia, with nominal production costs, a deficit budget and a deficit current account and a proposed public listing for its oil company, is unlikely to rein in production or oil revenue. But low oil prices also depress incomes in oil-producing countries, which is bad for Indian exports and disastrous for inward remittances — that are largely dependent on the Gulf countries remaining lucrative employment sinks for Indian expatriates.

Low growth potential in the coming years, combined with the domestic compulsions of the largest state election in Uttar Pradesh in 2017 and three smaller states and a national election in 2019, are likely to strain the fiscal discipline, which the finance minister has assiduously built up since 2014. Rajan was lucky. But had yet to be “Indianised”. He would have got there. But time ran out.

Needed an RBI Governor with the political acumen to align with the government’s compulsions. Must be able to quickly improve the well-being of voters. Must also have the economic guile to minimize the resultant damage caused by politics to the economy. Must have his finger on the pulse of Bharat; the experience of having walked this tightrope earlier and the good fortune of being lucky. Must be able to strike practical deals — with big defaulters to ensure that capital starts getting rolled over; with banks so that interest rate cuts are passed on to borrowers; with the government so that Rajan’s “dosanomics” inspired efficiency enhancing incentives are carried forward: cut red tape and discretion in licensing of financial intermediaries; keep interest rates positive in real terms; exercise forensic oversight over banking discipline. Must be reconciled to the macro-economic ball being carried mostly by the government. Must have the access and ability to discreetly warn the government against scoring self-goals.

Adapted from the authors article in The Asian Age, June 19, 2016 : http://www.asianage.com/columnists/does-rbi-needs-political-governor-511

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Rutba, an urdu word, means status or honour. In sarkari parlance it equates to the “shock and awe” evoked by a single determined officer. Some of this is larger than life, the stuff that legends are made of- like a single Sikh soldier equaling 1.25 lakh opponents in battle or a Gurkha mowing down dozens with a flashing Khukri.

The Americans are more practical about such things. For them shock and awe is unleashed via devastating fire power from the sky and thousands of armed boots on the ground. In India belief in the rutba of a single District Officer or Superintendent of Police to quell a local disturbance, still lingers.

Clearly, rutba, either of the Indian or the American kind, was lacking in Mathura, Uttar Pradesh, last week, when an armed mob of land grabbers, operating under the guise of social do-gooders and political anarchists, murdered two senior police officers and injured many more. Twenty-two squatters are reported to have died in the retaliatory police firing.

The occasion for the ruckus was a High Court order for their eviction from a public park they had illegally occupied since 2014, adjacent to the local police headquarters. It is not easy to preserve rutba if a police force has to be on good neighbourly terms with criminals camping unauthorisedly, on public land, right under their nose.

No dearth of Police martyrs

photo credit: rediff.com

Search the net and there are dozens of police martyrs you will unearth- in the North East, Bihar, Kashmir, Punjab, Andhra Pradesh and Mumbai, battling ideological or religious terror mixed up with mafiosi making a quick buck from fractured politics and instability. All police officers are trained to lay down their lives in public interest. But this ultimate sacrifice should be a last resort not a prime mechanism to evoke public or a substitute for full institutional support.Getting killed is not a good way to serve the nation. The idea should be to kill the sob across the line of fire – to paraphrase US General Patton. This is not easy in situations of domestic violence. The enemy is elusive, as are the support systems for an honest police officer.

Institutional collapse in the police

Rutba overrode such political economy obstacles in the past. But no longer. Rutba derives its salience from inherited institutional prestige and power. The only Indian institutions, which continue to demonstrate rutba are the Supreme Court of India and the army. A soldier, in uniform, still creates a stir and evokes awe. Similarly, the Supreme Court has retained its reputation for independence and fair play.

Under colonial rule, the police and the army were co-joined. Even today, in Uttar Pradesh, the Superintendent of Police is called kaptan sahib. Captains of the British Indian army, who had to be cashiered out because of injury, were appointed to the police, which was considered a “softer” job.

But the two institutions have been purposefully made to diverge, possibly to check mate each other and thus ensure the supremacy of civilian control over both. The army continues to be viewed favourably, as the one which does all the grunt work. The police are perceived to just hang about wielding a baton or a lathi, harassing people and pocketing bribes. In a 2002 Transparency International survey of citizen perceptions, the police were ranked as the most corrupt.

Bollywood, has for long, either reviled the policeman as a bumbling Inspector Clouseau- of the Pink Panther fame – or played up the image of the good, fearless cop- Amitabh Bachchan in Zanzeer; Om Puri in Ardh Satya and Ajay Devgun in Gangajal- who take on criminals and vanquishe all. Neither over-the-top-image is helpful.

The hapless police officer

Being a policeman is an unenviable task. The police work best, in a regulatory environment where the dos and don’ts are clear and align with the law. Today, there is nothing muddier than when and how, a police officer should wield the powers legitimately vested in her. Whom to challan or ignore for a traffic violation; how forcefully to quell unruly behavior on the streets – each petty incident, requires the police officer to first think through the political consequences. Decisive, timely, preventive action consequently suffers. Events snowball, as the local police wait for directions from higher levels, who ignore such events, till they explode and become “above the radar” on centralized flash point monitors. By them it is too late to save lives.

The colonial mindset- all are unequal

But are we all blameless? Indians, view the rule of law, not as a framework within which to mould our behavior, but as a hurdle, crossing which, is a metric of our prowess and power. District Magistrates and Superintendents of Police are required to be adept at this game of privileging and stratifying people – just as their colonial predecessors did.

photo credit: revleff.com

Your social status is reflected in the manner you are received by these worthies. The poorest, unorganized litigants are stopped outside the gate by police guards. Their only chance to get the big man’s attention is to hope his car will stop, as it moves through the gate, its window wound down, through which a written petition is allowed to be stuffed and heart rending pleas babbled.

For the middle class- petty businessmen, small farmers and the poor who come via intermediaries – lawyers, village and block level politicians or non-state actors – a darshan (face to face meeting) is usually arranged by the peon in tacit recognition of their collective power. The aggrieved persons stand before the big man and only the leader is offered a chair to sit, whilst the issue is briefly discussed and assurances given to get it “looked into”.

Photo credit: tribuneindia.com

MPs, MLAs, rich landlords, big business people and senior government officers are ushered into an “inner office” where the atmosphere is more relaxed and tea may be served or at least offered. When ministers visit and want to meet the DM/SP, who will “call on” (visit) whom, depends on the relative political weight -“closeness” – of the two to the Chief Minister.

Unreal laws

Under colonial rule, the rule of law primarily protected the interests of Europeans. Post-independence laws are aggressively egalitarian on paper but quite toothless on the ground. In Kenya, another previous British colony, till 2006 or so, a large land owner – usually European – could shoot to kill a trespasser, without application of the “quantum of force used” rule. In India this principle regulates the use of force for self-protection. The Kenyan rule, whilst unjust, was honest and aligned with political reality. It worked well to preserve property rights.

Our laws are hopelessly idealistic and un-enforceable. We have the right to private property but it can be taken away, quite casually, for ill defined “public purposes”. Purposefully poor oversight of public property and abetment drive encroachments. But the reason why we all view encroachment so benignly is that, the concept of property rights is very lightly embedded in our political and social consciousness.

The High Court was legally correct to order eviction. But the political circumstances which allowed the encroachment to happen, in the first place, made the order unenforceable. The cost of such hypocrisy is two dozen people dead, many more injured and a further nail in the coffin of the rule of law. We ignore the political economy, within which laws operate, only at our peril.

Adapted from the author’s article in Asian Age, June 11. 2016 http://www.asianage.com/columnists/mathura-failure-grassroots-governance-382

June 3, 2016 things reach a head in Mathura, a pilgrim town two hours by road from Delhi towards Agra.

Lord Krishan’s Temple Mathura. photo credit: easydestinations.net

The hot spot is a 200 acre plus public park, occupied in 2014 by a set of criminals and land grabbers, masquerading as social revivalist and curiously, political anarchist associations camps in the public park on their way to Delhi, from Sagar in Madhya Pradesh, to demonstrate against the Union government policies.

Lord Krishna’s land seems attractive to them. The land-rich public park even more so. They dig in and grow in numbers over time to around 3000. They establish a self-ruled colony – as most slums are- under the nose of the District police office. They play the political game to resist eviction, even thought the town residents want them out. The local police, ever hesitant to take strict action per law, least they upset the apple cart and displease someone important in Lucknow or Delhi, play possum. A convenient route for inaction is found. Register a Public Interest Litigation with the Allahabad High Court. The expectation is that the case will drag on for generations. Meanwhile the status quo can be preserved.

The massed “human shields” behind which the land grabbers hid photo credit: despardes.com

The Hon’ble High Court refuses to play ball. It swiftly orders the eviction of the interlopers. Cut to a young, conscientious, police officer – Mukul Dwivedi, Superintendent of Police (City) who leads from the front. Santosh Kumar Yadav, the Station House Officer of Farrah is with him. The task is difficult. The interlopers are armed to the teeth- guns, bombs and full of bravado. The police is aware of their arsenal. But they make the fatal error of underestimating the determination of the interlopers.

The police force is met with bullets, bombs, bursting gas cylinders and mayhem and is brutally beaten up. The SP dies from his wounds. The SHO is shot dead. Scores of policemen are injured. More police forces arrive. They retaliate with bullets. 22 interlopers are shot dead, beaten up or burnt to death in the ensuing melee.

The blazing battle of Jawahar Park: Photo credit: UPI.com

The blame for letting the situation get out of control is, as usual, put on the local police and district administration. Indeed they are to blame, because they had the powers to evict the interlopers long back, but did nothing.

But the price in blood is paid by the officers on the spot. The state government awards each of the families of the two police officers callously murdered, a grant of Rs 20 Lakhs each. Jobs for family members follow. The healing touch is applied to the living.

The real question is, what has the incident done for the image of the police and their morale. No one wants to die in vain. Mukul Dwivedi and Santosh Kumar Yadav would gladly have given their lives, if by “giving up their today they could build a better tomorrow for their colleagues in the police”. But have they?

Read the anguish expressed in a characteristically mild manner letter of condolence (below) by the officers recruited in 1980 to the IAS, IPS, IFS, IRS, IC&ES and the IAAS via the common UPSC examination. Most (including this writer) have retired. Those that still serve do so in leadership positions in the Union government and state governments. Other than the cohort camaraderie, what this group of 67 shares is despair, that the civil services should have come to this- where institutional inaction imperils their very lives.

Condolence message from 1980 batch AIS and Central Service Group A officers on the martyrdom of brave hearts: Mukul Dwivedi SP (City) and Santosh Kumar SHO Farah, Mathura

Sir,

We, the serving and retired officers of the 1980 batch of the AIS and Central Services Group A, deeply condole the untimely and violent death of Shri Mukul Dwivedi, SP (City), Mathura and Shri Santosh Kumar Yadav, SHO, Farah, Mathura.

We strongly condemn the perpetrators of this murderous assault on police officers performing their duties. We hope that an enquiry will swiftly identify the culprits and ensure that they are punished under law.

These brave officers have paid the final price in the call of duty to implement the orders of the Hon’ble High Court of Allahabad, in difficult circumstances, which were out of their control.

In doing so, they have held high the tradition of “service before self”, with courage and dedication and amply displayed their deep commitment to maintaining the Rule of Law. They have made us all proud.

Please convey our heartfelt grief to the families of the deceased police officers. We all stand with them in their hour of deepest sorrow.

We are also contributing Rs 50,000/- directly to each of the families of Shri Mukul Dwivedi SP (City) Mathura and Shri Santosh Kumar Yadav, SHO Farah, Mathura as a small token of our respect for the supreme sacrifice made by these two brave hearts.

First, like Dr. Manmohan Singh before him and unlike every other Governor of the Reserve Bank, Rajan became governor at the “tender”, almost youthful age -by Indian metrics- of just fifty years. This is a tribute to his compelling competitiveness for the position. But more importantly, this means he is likely to have a long professional after-life, once he stops being Governor, just like Dr. Singh.

Not wedded to holding everlasting public office

But unlike Dr. Singh, Rajan is keeping his professional options open in case his term is not extended in September 2016. Of course, Rajan is not the first RBI Governor to contemplate an after- life out of public office. I. G. Patel, who also became the fourteenth Governor of the RBI at a relatively young age, went on to head the IIM Ahmedabad and then the London School of Economics. He is also reputed to have declined the offer to become Finance Minister in 1991. But such instances of daring to dream beyond everlasting public office are rare.

The outsider

photocredit: mumbaimirror.com

Second, Rajan, unlike all his predecessors, did not come to the Governor’s office via the serpentine pathways of the extended public sector. Instead, like millions of upwardly mobile, middle class Indians of his generation, he earned his spurs in the US, in academia and then in the International Monetary Fund – where merit means having the capacity to challenge the established status quo with evidenced, sensible and better policy options.

Mission: To perturb, not preserve, the status quo for equitable growth

Perturbing the status quo is not a quality held in high regard in the backward looking Delhi Durbar. Here, precedent and incremental change- often mistakenly equated with policy predictability – command a premium. Rajan stands out for his impatience with an India, known perpetually for its potential but with an unendingly, shoddy present. Worse, he speaks out against a financial system, which has traditionally encouraged crony capitalism; been cavalier with the rights of the poor and constrained, rather than freed, India’s abundant animal spirits.

Tactics: Unafraid to work only for public interest

Third, Rajan’s single minded pursuit of macro-economic stability – read low inflation- in an increasingly uncertain world, marks him out as an outlier. The dominant, albeit convenient, consensus in India, is that we can simply spend our way out of an economic downturn, without feeling the pain of the structural reforms, which underpin sustainable and equitable growth. This is understandable, because inflation doesn’t really bother Imperial Delhi, Mercantile Mumbai or Harit Hapur- the triumvirate which moves India.

After all, babu pay and pension is 100% indexed to inflation, so why worry? Inflation doesn’t bother corporate India either. It pushes real interest rates into negative territory; reduces the cost of servicing debt and makes fresh borrowing cheap. Nor does inflation bother big farmers. The cereals or sugarcane they produce are sold on a cost plus price fixed by government. Never mind, that inflation is a silent killer – of daily wagers in the unorganised rural and urban sector, who have to eat one roti less, to make do and the lower middle class and the aged, who see their savings go up in smoke.

Metrics: Cut red tape and discretion in bank licensing

Fourth, by making available private bank licenses on-tap for eligible entities, Rajan displays completely Un-Indian haste in throwing away executive discretion in favour of transparency. By disciplining banks and forcing them to clean up their balance sheets, Rajan is exceedingly Un-Indian. He hits at the roots of the cozy relationship between politics and corporate money, which dates back to the Freedom Movement.

Market value: Options on both sides of the Indo-American universe

Lastly, Rajan’s ultimate betrayal of Bharatiyata is that he holds a Green Card, which entitles him to permanent residence in the US. Even worse, he wants to hang onto that privilege, if he gets a second term as Governor, post September 2016. Should he not have reciprocated his everlasting gratitude to the nation, on being appointed Governor, by tearing up his Green Card? Certainly, it would have been a grand gesture of his long term commitment to India, had he done so. But in a democracy, contractual obligations are determined by the law, not sentiment.

Attitude: Professional not a supplicant

But most galling is that by hanging onto his Green Card, Rajan displays a very Un-Indian desire to seek a second term, not as an abject supplicant but as a professional, on terms, which are mutually acceptable between him and his employer – the Government of India. Of course this is never-before-seen arrogance, by the standards of the public sector, where applicants must wait cap in hand, for the chance to serve.

Role model: For Indian bureaucrats

The upside, in this otherwise grim tale, is that Rajan’s approach is the only way we will ever have a professional, merit based bureaucracy, working in public, rather than narrow political interest. The internationally recognized system of contractual, senior public service appointments, has never found salience in India because politicians fear losing control over a pliant bureaucracy. Contractually appointed professionals, like Rajan, can say no, because they have market based options, outside the public sector.

Every Indian expatriate values competition and choice

But, consider also, that the hordes of expatriate Indians who throng Prime Minister Modi’s meetings overseas, are similarly Un-Indian, like Rajan, because they value competition and choice above embedded entitlements.

Not too different from any other worker in the Indian private sector

Guess what, 97% of the workforce in the Indian private sector are also Un-Indian, like Rajan, because they have no secure, life-time tenures. They face the test of competitiveness, on a daily basis.

Photo credit: Business standard.com: Finance Minister, Arun Jaitley very much in tune with the future.

In fact, even Finance Minister Arun Jaitley might also be Un-Indian, under his very Indian clothes. After all, he does seem to be quite comfortable with Rajan and birds of a feather flock together. But, then again, perhaps not. After all, Jaitley’s Hindi is impeccable, whilst no one has ever heard Rajan speak in Hindi. Field Marshall K. M. Cariappa, India’s first commander-in- chief of the army, couldn’t speak in Hindi either. When berated by the entho nationalists of his time, he riposted, that he made up for not knowing Hindi by having a dil (heart) which was “ek dum Hindustani”. Surely, so is Rajan’s and that should be good enough.

Field Marshall K.M. Cariappa- speaking from the heart

Adapted from the authors article in Newsiaundry May 23, 2016 http://www.newslaundry.com/2016/05/23/why-raghuram-rajan-is-not-indian/

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photo credit: indiatoday.com. How many 2000 cc plus private diesel cars can you spot in this randomly selected grid lock? Imposing a green cess on large diesel cars is populism at its worst. Less than 5% of private cars fall in this category and they have fairly competitive exhaust parameters because diesel engine technology has come a long way from the 1990s. The real culprit is the dirty fuel supplied in India.

The practiced ease with which the Supreme Court settled the Uttarakhand political snafu and restored constitutional propriety and federalism there, with President’s Rule being lifted, compares unfavourably with its dilatory proceedings on the use of diesel for fuelling cars in Delhi.

To recap, the Supreme Court banned the registration of diesel cars with engine capacity of and above 2000cc in December 2015 at the height of the smog scare in Delhi. Earlier this month, it tried to enforce its April 1 deadline for all taxis in Delhi to convert from diesel to CNG, but later backed down due to the economic dislocation it would cause.

The court’s association with the micro-management of fuel, technology and urban air pollution in Delhi dates back to 1993, when it acted on a PIL to clean Delhi’s polluted air. Thereafter, the government practically ceded ground to the Supreme Court as the prime mover for preserving clean air in the nation’s capital. Citizens still applaud its historic 1998 order making CNG mandatory for all public transport in Delhi.

The Supreme Court didn’t like diesel as a fuel then, and its views today remain the same, though the technology and circumstance have changed considerably. It is generally accepted that bringing Indian fuel standards on par with Europe is the best option to lower urban pollution from motorised transport. The government has plans to upgrade fuel standards to European levels (Bharat VI) by 2019. But the government lacks credibility in making such promises, given its past record. This implies the need to monitor how well the government is working towards that goal.

Why diesel?

photo credit: greencarreports.com

Globally, diesel has become the fuel of choice in the past two decades since the Kyoto Protocol on climate change imposed carbon emission targets on developed nations in the 1990s. Diesel cars produce considerably less carbon emissions than petrol cars, but have higher particulate and NO2 emissions. Improving the quality of diesel supplied — along the lines of city diesel, that is low-sulphur, clean diesel developed in Sweden — reduces the particulate and NO2 emissions to acceptable levels. This is what Europe has done. India can and should do the same.

In the short term, the Union government should equalise customs and excise duty on diesel and petrol. The Delhi government should do the same for value added tax. This will remove the artificial retail price advantage of 20 per cent enjoyed by diesel.

The fatal preference for diesel versus petrol goes back to our ersatz socialist past, when the lazy rich drove petrol cars while others used tractors, agricultural pumps, buses and trucks running on diesel, which was thus subsidised.

Today, the rich use large diesel cars while the growing middle class uses petrol-based scooters, motorcycles and cars and small cars running on diesel.

All public transport has converted to CNG and there is negligible agricultural activity in Delhi. These are ideal conditions for scrapping the preferential tax structure on diesel.

Correcting a tax-based market distortion will not attract eyeballs, nor does it appear as high-minded as imposing a “green cess”. But this is the right thing to do. Expenditure on fuel comprises around 25 per cent of the life cycle cost of running a car. So getting the price of fuel right is a key step to change consumer preferences. If a litre of petrol comes at the same retail price as diesel, much of the demand for diesel cars — particularly in the sub 2000cc segment — will simply vanish.

Green cess on large cars- populism at its worst.

The wrong thing to do would be to put a “green cess” on the registration of large, private diesel cars in Delhi as the Supreme Court seems to prefer. First, if a “green cess” is to be imposed, then in the interest of equity, it should be imposed on all “polluting” passenger vehicles that are not fueled by CNG or electricity.

Second, prescribing engine capacity as a metric for punitive taxation encourages gaming. Manufacturers will go marginally under the radar by “cheating” on capacity calibration with no benefit in emissions.

Third, imposing a selective “green cess” on engine capacity rather than emissions, which is a better, albeit easy to cheat metric, can be misread as populism and just bleeding the rich. Large diesel cars are just around five per cent of the car stock in Delhi. The cheapest large diesel car comes at a price of `20 lakhs-plus on the road. Of this, 45 per cent is tax and other government levies collected by the Union and state governments. Budget 2016 imposed an additional cess on large cars on top of the existing high excise duty.

If the intention is to penalise the use of large cars per-se — defensible environmentally on multiple counts — then the green cess should be imposed on all large motorised vehicles and not just diesel cars. The excise duty structure does that already. Excise duty on large cars is three times higher as compared to the duty on small cars. The real question is why make large cars unaffordable? What are the economic consequences thereof on jobs and economic growth versus the environmental benefits?

Going back to ersatz socialism?

Prior to the 1990s, the government used to dictate to industry what to produce and thereby constrain consumer demand. The government abandoned its policy of invasive ersatz socialism for good reasons. Why revisit a model which penalises wealth creation that is rightly dead and buried?

Banning the registration of large diesel cars in Delhi is an avoidable knee-jerk administrative response with unfortunate economic consequences. It disrupts economic activity (car production and consumer choice); puts people (taxi owners, drivers and consumers) in financial jeopardy and creates uncertainty through a rule-by-fiat approach.

There was never much to be gained from this ban in terms of cleaning Delhi’s air even in the short term. The bulk of air pollution is from point sources other than diesel cars. Aggregate pollution from motorcycles and scooters that run on petrol far exceeds the pollution from cars. Dust, agricultural residue, industrial stack emissions and soot from coal comprise the bulk of particulate emissions.

Citizens welcome judicial activism in the supply of public goods like clean air as the government routinely failed to provide them in the past. But all governments are not the same. Should not the principle of “judicial forbearance” prevail till a government fails? Let the government do its job. But keep a sharp eye out for citizen rights. Economic policy is about experimenting with trade offs, across multiple objectives and options, for which the law provides no real answers.

Adapted from the authors article in Asian Age May 17, 2016 http://www.asianage.com/columnists/don-t-demonise-diesel-955

Photo credit: NDTV.com: Harish Rawat – the unfortunate Congress Chief Minister, sacked by the President of India for failing to fulfill his constitutional mandate to get the budget approved

Nothing illustrates the cost of wantonly discarding democracy and handing over the government to unelected officials (Governor) than the case of Uttarakhand. To recap the turn of events , the President of India (read the BJP Union government) was pleased to take control of Uttarakhand on March 27, 2016, by invoking constitutionally vested emergency powers available to it if an elected state government fails to discharge its constitutional mandate.

The occasion for doing so was an allegation, by the Bharatiya Janata Party’s members of the Legislative Assembly, who are in a minority, that the Budget for 2016-17 was not approved by a majority vote in March, as required, to keep public finances running in the new year — April onwards. The ousted Congess government strongly refuted the allegation and approached the Uttarakhand high court, in appeal against the Presidents order. On March 28, a single judge of the Uttrakhand rubbished the President’s order. The Union government filed for revision of this order. A division bench however confirmed on April 21 that Presidents rule was unwarranted. The matter is now in the Supreme Court on appeal against the high court order. A ruling is expected this week but early indications are that the Court leans towards asking the ousted government to prove its majority on the floor of the Legislative Assembly, as is the norm and which aligns with what the Uttarakhand Governor had directed in the first place, once the dispute arose.

The absence of political leadership shows

But forget the legalese. The fact is that Uttarakhand has been without an elected government to take charge and be accountable for over a month now. It is fashionable for citizens to blame politicians for all the ills in the country. Unfortunately, the official machinery has failed miserably to showcase its strengths by managing the ongoing forest fire disaster. This illustrates that the “iron frame” of the bureaucracy is now so rusted that it fails to be proactive even when there are no visible political constraints on them.

Jhoom an age old practice

The people of Uttarakhand are no strangers to forest fires. Indeed, this writer has had out of control fires in previous years licking the boundary of his home and it has happened again this year. Just like in California, where habitations co-exist with forests, lighting fires can be property and life threatening. In India, the foresters and villagers resort to it as a low-cost, low-labour intensive practice to clear the fallen pine needles and accumulated undergrowth so that fresh grass sprouts from underneath for cattle to graze on. Till not so very long ago jhoom (slash and burn) cultivation — regularly setting fire to land and leaving it fallow to regenerate — was common practice. It is still followed in the Northeast.

The problem arises when local fires are poorly managed and they grow out of control and ravage vulnerable people (the old, the differently abled and the very young), homes, cattle, wildlife and indeed trees, none of whom can get away quickly.

Lack of advance red alerts

Unfortunately, this year was different in a manner which people never recognised. The lack of rain created tinder box conditions. A more proactive bureaucracy would have sounded the red alert early, launched a communications campaign to sensitise the public against the danger, set up a war room fed by daily updates via sms and Facebook and designated local champions to lead the effort and build public opinion against jhoom.

Remember how Chandi Prasad Bhatt- alarmed at deforestation on an epic scale in the 1970s- a major cause for the Alakananda floods at that time – galvanised the women of Garhwal to launch the “Chipko Movement” (literally hugging trees) to guard against the rampant logging? He showed it is possible to build strong public opinion if people’s self-interest is shown to be aligned with a public cause. Managing perule better is a similar public interest issue.

Short sighted programme implementation

A previous government programme, which could have tackled the root of the problem, aimed at buying perule (fallen pine leaves) to incentivise villagers to collect them, rather than setting them on fire. Unfortunately it has long fallen into diuse. Villagers say it died because the amounts offered by the government were unattractive. Foresters say the villagers are too lazy to work and look for easy earnings and viable options for recycling perule were never developed. Also viable methods for recycling peruleby compacting it into and selling, or the villagers themselves using it, as fire wood were never commercialised. Lack of sustained interest and lack of public finance effectively buried the programme even though it could have diluted the extent of the current ecological disaster by reducing the vulnerability of forests to catch fire.

Preventing disasters is nobodys business

But the real problem is that governments routinely under-spend on preventing disasters in comparison to the potential loss. Also, the tendency is to buy new equipment to manage disasters once they happen, rather than evolve low-cost, local options to prevent them. Had Uttarakhand done so, it would not be facing the terrible social and environmental costs of doing nothing.

A more technically savvy bureaucracy could have redesigned the old perule (pine needles) purchase programme to make it more attractive. But none of this happened. Minus a chief minister, the bureaucracy was a leaderless army. Local administrations headed by the district magistrate became a dead letter box into which the secretariat heavies dutifully dumped warnings and advice, sans funds, for guarding against fires.

This is not to say that the Uttarakhand bureaucracy was as callous as the Supreme Court described Union government bureaucrats to be. Whilst rapping them for not bringing forward evidenced solutions to reduce air pollution levels in Delhi, the court said: “Why can’t they come up with some research and solutions? You people are just sipping coffee and doing nothing”.

What is true for Delhi is not necessarily true of state-level bureaucracies, which have responded magnificently, in the recent past, to disasters in Gujarat, Orissa, Andhra Pradesh and Tamil Nadu. But they all had a chief minister directing the coordinated effort that relief requires.

The key assurance an official seeks in an emergency is that his/her actions, taken in public interest, will be assessed not on the basis of how closely the regulations were followed, but on the context in which decisions were taken, and their effectiveness, in solving the problems disasters throw up.

This type of reassurance can only be credibly given by a duly elected chief minister. In today’s context, it takes a politician even to make the trains run on time! The colonial model, where the officials led and politicians merely presided, is past and buried.

Local political leadership is key

Sans a chief minister in Dehradun, it is Delhi which is sending money, choppers and the Army to deal with the disaster. But only elected governments at the state and the local level can engage continuously to prevent disasters and effectively manage those that occur.

But the last thing to be wished for, in a disaster area, is a government led by officials with no effective political oversight. Even a bad chief minister is better than no chief minister at all. One hopes the Supreme Court will take note and end Uttarakhand’s misery.

Photo credit: Zeenews.com – Chief Justice of India, T.S. Thakar breaks down whilst sharing the misery of a judge’s life with Prime Minister Modi- the government promised to do better at staffing and funding the justice system.

Adapted from the authors article in Asian Age on May 3, 2015; http://www.asianage.com/columnists/fuelling-fire-979

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Everyone loves a royal – especially a British royal, even cynics who claim to disdain them. And why not? There is something reassuringly middle class about being born to the good life and yet having to work hard – saying the right things, looking good, being on time, spending hours chatting with complete strangers and still remain in good humour. The job seems perfect for future age, fail safe robots. Till that happens, the Brits have the royal family – all eighteen of them headed by Queen Elizabeth – who turns 90 next week. Each royal has public duties. Taken together, the family makes itself available for a mind boggling 240 events every month or 8 a day, year in and year out, a burden even the most hardened socialite would wilt under.

The British royals are an especially diligent lot possibly because they draw their legitimacy, not from a divine right to rule, but from Parliament which contracted them for the purpose in 1701. They are funded from estates allotted to them and an annual Sovereign grant of around GBP 35 million (Rs 350 crores)- considerably more than the Rs 30 crores we spend on the office of the President of India. But consider, that per capita income in the UK is twenty times that in India. So in relative terms, the UK outlay is probably tighter than ours for a similar representational institution.

The Duke and Duchess of Cambridge-stooping to capture hearts and minds. Photo credit: rediff.com

The British royals have changed with the times. The stiff upper lip is going. Princess Diana’s inimitable compassion and common touch are now the norm. More significantly, male primogeniture- the gender insensitive British royal practice, whereby a male child always got precedence in succession was ended in 2013 by an Act of the British Parliament.

In comparison, Indian royals somehow never managed to make the transition from being rulers to becoming representatives of the new Indian state. Possibly they failed to brand themselves for the new India. The people’s movement character of the independence struggle, crafted by Mahatma Gandhi, discredited the royals further, as remote, effete relics and toddies of colonialism. Independent India went further. It sought and obtained, the surrender of their sovereignty to the India State in 1949. In 1971 the Indian Parliament abolished their titles and privy purses – pensions to which the erstwhile royals were contractually entitled under the 1949 settlement.

Very few Indian royals managed to remain politically relevant. The Scindias of Gwalior stand out as exceptions who straddle the two main national political parties. Jammu and Kashmir royals and currently the Patiala royals also remain politically alive. But the other significant royals – think Hyderabad, Mysore, Baroda, Bhopal, Indore, Udaipur, Travancore, Kota, Bharatpur, Bikaner, Jaipur, Jodhpur and Cochin- have faded from public memory and affection. In South Asia, Bhutan’s royals stand out as proactive modernisers – British style. Nepal royals, in contrast, have succumbed to democracies march- much like in India.

You can abolish a royal by fiat but you can’t legislate royalty away. If you destroy traditional elites, new elites spring up, because they serve a social purpose, as glue, to bind society together, even in a democratic polity. The US has the Kennedys and the Bush family. In India, the Nehru-Gandhi family endures and inheriting a political legacy is pervasive. In 2011, 29% of the Members of Parliament were from established political families. But it is debatable whether these “political royals” have the affection of the people. It is telling that Amma, Didi and Bhenji- immensely popular in their areas – are all “Marlboro” women – who have built their political eminence not inherited it.

The 2016 Padma Awardees: Photo credit: masala.com

But the real royals of independent India are movie stars, cricketers and the owners of big business- all fiercely competitive and determined to succeed against all odds. The Kapoors of Bollywood – traditional royals mix shoulders with new royalty- the Bachchans, the string of bigger than life “Khans” and Priyanka Chopra- who got a Padma award yesterday. We have an entire locker room of cricketing royalty, of which Mahender Singh Dhoni and now Virat Kohli are the most recent. Star struck business honchos abound. These “new royals” inhabit an interlocking and sometimes toxic world, of business, cricket and movies.

William and Kate – the Duke and Duchess of Cambridge, in line to succeed to the British throne, are of this generation of competitive royals. It is not surprising then, that they chose to schmooze with the new royals of Mumbai in their search for creating “new” Indian memories on their recent visit.

Tragically however, Mumbai’s mojo has yet to infuse Delhi, which remains near colonial. Never mind the eye balls you may draw; the advertising revenue riding on you or the name recognition you command. If you did not become a bureaucrat by age 25 and if you are not in politics, it is unlikely that the government will ever select you to serve the nation in a representational position – as Governor of an Indian state or as an Ambassador overseas. Incidentally, both positions entitle you to fly the tricolour. And so the wealth of available talent — academic, artistic, scientific, professional and entrepreneurial, is ignored. Is it surprising then that government is so stiflingly insular and non-competitive, quite out of keeping with the mood of the nation? Imagine our dated we are. The website of the British monarchy is at pains to inform you how much is spent on the Royal Family. The website of the office of our President is silent on this information and since Parliament does not vote to approve these expenses they are hard to come by. President Mukherjee has done more than most to open up the premises. But the institutional culture is forbidding.

The Padma awards, announced annually are our only mechanism of recognizing exceptional civilian personal merit and national service. These serve the purpose of one-off recognition. But independent and demonstrated talent should be associated more routinely, at every level of government, to leverage experience, build capacity and kindle the spirit of innovation.

Multilateral agencies, including the United Nations, are adept at co-opting celebrities to helm good works and campaigns. The British use their royals very effectively for showing the flag. Why not use our new royals similarly by vacating sarkari space for them? Give Padma awards to recognize long and meritorious service in official and public life. Give Governorships and Ambassadorial assignments to those who distinguish themselves in real life and wish to step out temporarily to serve the nation directly. You would be surprised at the power of incentives to change things around.

Which of us does not enjoy pulling down the high and mighty? And the thrill is even sharper if these are people who may have breached laws whilst rising to dizzy heights. And so it was with the recent Panama Papers leak which opens a window into the morbid financial gymnastics of the amoral, global elite. There are five hundred Indians also in the list. But no “A” team players have yet been disclosed. Of course there is considerable overlay between unaccounted money and simply “smart” money which is avoiding not evading tax- the former is illegal but the latter – well it is just good financial management. The Panama data leak does not sift out the latter.

The scale of dirty money

photo credit: gizmodo.com

Global Financial Integrity (GFI) – a United States-based entity, which tracks and campaigns against black money – ranks India fourth out of 149 developing countries, after China, Russia and Mexico, on the basis of the volume of illicit outflows. But this metric is fuzzy. It relates outflows to the size of individual economies and consequently fails to reflect the severity of the problem in each country.

Conflating the GFI data on illicit flows with the World Bank data on GDP at current market prices results in a more useful metric. The average annual illicit outflows as a proportion of GDP for India, according to this metric, was 2.7 per cent over the period 2004 to 2013. Within the BRICS countries cluster, South Africa was at a whopping 23 per cent, followed by Russia at 5.6 per cent. Brazil was the lowest at 0.9 per cent, with China the second lowest at 1.8 per cent.

Out of the other large developing economies, illicit outflows out of Malaysia stood at a worrisome 14.1 per cent of GDP, Thailand at 5 per cent, Mexico at 4.5 per cent, Nigeria at 4.1 per cent and Indonesia at 2.1 per cent. In South Asia, Bangladesh is the leader with illicit outflows at 4.2 per cent of GDP, followed by Nepal at 3.1 per cent and Pakistan at a low 0.1 per cent.

Dirty money links

So, how do illicit outflows, tax evasion, corruption and crime link up? Simply put illicit flows legitimize the proceeds of any of these activities. In the hawala transfer route, an individual or entity, resident in India, desiring to transfer dirty money overseas, makes a payment in cash in India to a hawala agent whilst a designated counter-party overseas gets paid in foreign exchange.

The source of the cash in India could be from income on which tax has not been paid or the proceeds of crime, including corruption. The foreign exchange overseas could be similarly sourced from corruption, crime or from Indians remitting money home (remittance of invisibles, including by overseas Indians of their earnings, was around $223 billion in 2013). Remittances through hawala get a better exchange rate than those via bank transfers. Foreign exchange overseas could also be the proceeds from under-invoicing Indian exports with part payment being made by the foreign importer to an overseas account related to the exporter.

Such illegal caches of foreign exchange overseas can be legitimated by bringing them back to India by over-invoicing Indian exports. Such funds can also be masked as foreign portfolio investments from foreign jurisdictions where obscuring the ownership of funds is a fine art, as in Panama. GFI estimates that under and over invoicing of trade flows accounts for 83 per cent of global illicit outflows. Usually a combination of several illicit transfer mechanisms may be used to obscure and mask the direction and ownership of the net flows.

The drivers of dirty money

Crime, corruption and the ability to avoid tax are all the outcome of poor governance aided by low levels of financial intermediation and digitization in the economy. Identifying the real ownership of bank transactions using biometric tracers, reducing cash transactions, embedded red flags and alerts which identify and monitor irrational transactions and sniff out a mismatch between income and consumption or income and savings, are standard tools for clamping down on the extent of black money. But we have started down this path only very recently.

Till the 1990s, when India had a chronically precarious balance of payments, the loss of foreign exchange through illicit transfers was a major concern. Today with foreign reserves at around one year of imports this is less so. But the loss of potential tax revenue hits us hard. Assume the value of tax lost on illicit outflows of $83 billion at a conservative 30 per cent or $24 billion per year. This equals around one-fourth of the average fiscal deficit during the period 2010 to 2013.

Lost tax is just one of the problems associated with dirty money. Other downsides are less tangible. Strong political and business interests get entrenched which obstruct enhanced transparency, the reduction of discretionary administrative powers and systematically subvert the formal governance systems and the informal norms which bind society.

Where this happens over a period of time, societal norms shift towards a new normal which actively subverts the rule of law. Prolonged conflict creates a similar loss of cultural and social capital. Government loses credibility as the provider of security and the arbiter of equity and fairness. Citizens look to informal structures like caste, clan or even professional alliances for social support.
Triangulating the evidence

Can we substantiate this link between poor governance and enhanced illicit outflows? The World Bank’s Worldwide Governance Indicators (WGI) provide a ready index which maps six drivers of good governance across multiple data sources. For our purposes we look at two of these – Rule of Law and Control of Corruption. A close and negative correspondence between illicit outflows and the country WGI score can validate both the WGI and the GFI methodologies. High illicit outflows should correspond with a low WGI score.

The WGI ranks Brazil, Malaysia, South Africa and Thailand high on both upholding the rule of law and exercising control of corruption. India edges in only into the Rule of Law category in this ranking. But good performance in the WGI has not helped Malaysia, South Africa and Thailand curb illicit flows which are high, relative to GDP. In comparison, China and India with lower ratings in the WGI have far lower illicit outflows relative to GDP.

Similarly, Pakistan and Indonesia have minimal illicit outflows relative to GDP but score very low in the WGI index. The bottom line is that either the GFI assessments need to be improved or that good governance- at least as it is measured to day needs to be reviewed.
The trend going forward

GFI estimates that the aggregate outflow of illicit money for the set of 149 countries grew at 6.5 per cent per annum during the period 2004-2013 – more than double the rate of economic growth. This is worrisome because it illustrates a looser than desirable link between growth and tax revenues. If economic growth is leaky and does not boost tax revenues in developing countries, achieving social protection and human development targets can be severely compromised. Is India sliding down this slippery slope?

In India, illicit outflows more than doubled overnight from $29 billion in 2009 to $70 billion in 2010. During the period 2010 to 2013 – the latest year for which data is available – it averaged $83 billion per year or around 4 per cent of GDP. This period coincides with the second term of the United Progressive Alliance government, which was marked by serial scams in telecom and coal. But whilst it is tempting to deduce a causal relationship between the two, this is difficult to substantiate.

Better tools can help

What we do know is that we need better tools to monitor, in real decision time, the origin, magnitude and direction of illicit outflows, which are a vital red flag for poor governance. Achieving this is closely linked to professionalizing the government and rapidly digitizing the economy and government processes. We are doing far more on the latter, than on the former. This could be a costly and careless error. Till advanced robotics and artificial intelligence kick in sometime around 2030, the effectiveness of government servants will continue to matter

The curious case of Uttarakhand (a small hill state in north India) shows that getting elected to political office confers powers but no responsibilities.

The otherwise placid, hilly paradise was rocked by frenzied politicking in end March, as Congress dissidents lit a fire under their own government, even as forest fires lit to clear shed pine leaves gusted up clouds of carbon and heat. Tellingly, citizens were more concerned with managing the forest fires than the fallout of the political shenanigans.

Photo credit: disaster-report.com

The Harish Rawat-led Congress government still has one year to go. But it fell, because former chief minister Vijay Bahuguna and Mr Rawat’s ex-buddy from Garhwal, Harak Singh Rawat, and seven others pulled the plug on it. Their timing was cannily disruptive since the annual budget could not be approved — politically effective but irresponsible from a citizen’s viewpoint.

Triple political no-balls

What followed was a comedy of high-level bungling. The Speaker, Govind Singh Kunjwal, disqualified the dissident Congressmen the anti-defection legislation for voting against the government. But it is alleged that he did so only after the President of India had already put him and the state Legislative Assembly under suspended animation by dismissing the government.

Also, subsequent to the budget approval snafu, governor Krishan Kant Paul had already directed on March 18 that the state government prove its majority on the floor of the House on March 28. Why then did the President of India (read the Union government) scramble to dismiss the government on March 27, just a day before the vote of confidence?

The Congress approached the Nainital high court against the dismissal of their government. The honourable single-judge ordered on March 29, somewhat unusually, that the Congress test its numbers in the House on March 31 even though the Legislative Assembly had been suspended by the President of India. Expectedly, this order was stayed on appeal by a division bench of the court.

Politically motivated manipulation of constitutional powers is not new. But consider how low representative democracy has fallen and how remote politics has become from the people who chose to remain indifferent to the political machinations. It was not always like this.

photo credit: tribuneindia.com

Leading up to November 2000, when the state was formed, the mood was upbeat and passions inflamed. The hilly areas of Garhwal and Kumaon had revolted against the allegedly quasi-colonial rule from Lucknow — the erstwhile city of nawabs, sheermal, galawati kebabs and the capital of Uttar Pradesh. Cut to 2016, and the dismissal of a duly elected government evokes no popular response at all beyond gossip at nukkad teashops. Apparently, the average citizen gets galvanised politically only when it is time to vote.

Dysfunctional inner-party governance

Consider also how dysfunctional our political parties are. A significant section — more than a quarter of the Congress MLAs — could not resolve their grievances through inner-party governance systems and chose to create a constitutional crisis to hit back at their party. They did not act out of high moral principles. Nor were there difference with the party around policy, legislation or programmes. Their rebellion was borne out of perceived insufficient recognition by the party of their merit, effort and political standing. Equally, it was irresponsible of the Congress, to ignore the growing dissidence, secure in the belief that the anti-defection legislation could contain dissidence and that there was still one more year before citizens could vote to call it to account.

Sadly, the five-yearly spells of public accountability do not protect citizens sufficiently from irresponsible governments. Can we do better?

Power to recall non performing MLAs

photo credit: English.pradesh18.com

Being empowered to recall recalcitrant public representatives can make public representatives responsive to citizens. But Indian voters do not have this power, unlike in North America and Switzerland.

Technological improvements can help. Biometric identification can cheaply and correctly verify discontented voters who could digitally communicate their intent to recall, thereby triggering a re-election. The “Save the Net” campaign last year and subsequently supporters of Facebook/Internet.org, flooded Telecom Regulatory Authority of India with electronic messages. Voters could similarly message the Election Commission.

Devolve to dilute the zero-sum game of centralized politics

A second option to hold politicians to account is to devolve political office and powers closer to where voters live so that people can actively participate in overseeing an elected politician. The constitutional provisions have existed since 1992, but they have never been implemented in good faith and with full earnestness. Despite the rhetoric, there is little political appetite to let go of centralised powers in the Union and the state governments — both of which function remotely from people.

Our centralised, political ecosystem and architecture have created sticky political interests at the national and the state level.

Rarely does a village-level politician graduate to politics at the state level and even less so to the national level. The India-Bharat class divide exists even in politics.

True to their class ethic, state-level politicians perversely prefer to lose power to an opposing party, in the hope that it would come back to them one day, rather than see power trickle away permanently down to local levels. Consider that the consequence of a state government being dismissed is not the empowerment of local governments, to pick up the slack and fill the vacuum, but instead power is sucked back to Delhi where all state-level politicians aspire to work.

Would the Uttarakhand Congress dissidents have been as ready to rebel and trigger the dismissal of their government if the consequences were that elected leaders at the town and village levels would get vested with the executive powers of erstwhile state ministers and carry on working? Consider also whether the Union government would have been as willing a participant in the dismissal game, if the consequences meant executive powers being transferred lower rather than to the national level.

A chief minister under siege from his own party. photo credit: indianexpress.com

Petty palace politics and dodgy moves will continue to blight political stability and retard effective executive action, unless we rejig the institutional structure to generate political incentives. Citizens must be able to hold governments to account in real time.

Weird as it may sound, despite the rhetoric around innovation and private entrepreneurship being key for growth, this is not the consistent message emanating from government policy and regulations. Here are three examples.

Ideological neutrality versus enlarging access to the internet

First, consider that TRAI caved-in, in February 2016 to the “shrill voices” demanding that Facebook/Internet.org be stopped from offering free basic (limited) internet. The wooly thinking behind this decision was that Facebook- a deep pocket player- could thereby lure users to the Free Basics site- dubbed by activists as a walled garden, from which there would be no escape. Customers would be so entranced by the scented garden, that they would never wish to explore anything beyond the limited products on display within. This may have pleased Facebook- the description of Free Basics closely matching what heaven must be like- but they upped stakes and left.

Foreign companies make easy targets

Most likely Free Basics, a foreign venture, was just an easy target. TRAI probably played to the home grown, software industry – represented by NASSCOM- which was up in arms against the foreign interloper. But it is the consumer who lost out- particularly those at the margin of attaining internet access. These millions could have been in a free walled garden. Today they continue to wander through the dust of an internet less but limitless, real desert.

The economic cost of banning access to free basic internet

ICRIER, a Delhi based think tank, is assessing the economic cost of not providing internet access through a nineteen state survey. Preliminary assessments show that there is a significant increase in GDP by adding more users to the internet. The, un-confirmed, upper-bound assessment could be an astounding additional GDP growth of around 2.5% if the number of internet users are increased by 16%. This is exactly what Free Basics would have done. But they have been thwarted by rules, which adversely impact competition, jobs and wealth creation via innovation.

Sadly, this is not the only example. Yet another instance of rules which increase the transaction cost of doing business for innovators, rather than reducing it is the new FDI regulations permitting 100% foreign equity in e-commerce market platforms. Whilst the relaxed FDI limit is progressive, the additional constraints it comes with are not. One condition is that no supplier should have more than a 25% share in sales on the platform. Another condition is that the market platform must not influence retail prices.

e-market platforms are not stock exchanges

The government’s conception of an e-commerce platform seems to closely resemble a stock exchange, which is hands off aggregator and facilitator for matching demand and supply. Why then would we need more than one such e- commerce platform – since profits lie in scaling up operations? God forbid if the next step is to specify that the market platform must be co-operatively owned by all the suppliers.

Lip sympathy for bricks and mortar retailers

The underlying concern behind the restrictive concerns seem be that e-commerce market places should not disrupt the business of stand-alone bricks and mortar retailers by offering deep discounts, using private equity funds, to grab market share. True private equity driven scaling up can bankrupt inefficient and under- funded retailers. But isn’t it in the nature of business to remain efficient via disruption? Government needs to concern itself not with the fortunes of individual businesses but the aggregate health of the retail sector- employment and customer services provided. Instead of protecting individual jobs, government must grow the total number of jobs recognizing that innovation- by definition, is disruptive of the status quo.

In any case rules to artificially maintain the status quo are rarely effective. They can be undermined and evaded. That is not the concern. The real concern is the adverse impact, that impractical rules have on the innovation eco-system. Innovators and their financiers, expose themselves to enormous business risk. The last thing they need, as an add-on transaction cost, is the risk from uncertain regulation.

Why extend the broken business eco-system of legacy industries?

There is also the issue of the attracting the wrong kind of innovators and private equity- those who are adept at working within a tightly regulated regime using the nod-wink approach to compliance with rules. This was a key qualification for doing business in India earlier. It should not be allowed to become the norm in e-commerce also.

We acclaim IIT/IIM graduates who are courageous enough to start their own e-business. But why tie their hands behind their backs from the start by forcing them to be dishonest; by requiring them to innovate a business model which will hood wink the law. And what about the potential risk that these illogical regulations may be tightened further. For example, prescription of rigorous tests for a Chinese wall between the e-market platform and the suppliers with respect to shareholding; a ban on inter-company loans from cash rich platform developers to suppliers to avoid the short circuiting of the discount ban by setting up shadow, intermediate whole-sellers between the market platform and the actual suppliers.

Most importantly, the desire to tick the box on allowing 100% FDI in marketing platforms whilst mollifying the lobby of bricks and mortar retailers, has derailed the existing eco-system for innovation in e-commerce. Rather than getting out of their way, the government has ended up increasing the potential nuisance from the new regulations. This is not a healthy environment for promoting innovation.

Remember the boom in private IT and telecom business?

The spectacular IT growth since the 1990s was the result of facilitation rather than intrusive regulation. Similarly, the telecom industry grew exponentially post-2000, because the quality of regulation was light handed and promoted competition rather than intrusive regulation of business processes and pricing of retail services.

Electricity – the limitations of intrusive regulation

In sharp contrast, the electricity supply industry has intrusive cost of service based retail price regulation. The results are before us. Despite three separate schemes, since 2000, to restructure the stressed loans of electricity distribution companies, they still comprise a quarter of the non-performing assets of public sector banks. Whether privatization of electricity distribution in 2000- as was envisaged then- along with liberalization of the energy supply chain, could have had happier results, is in the realm of speculation. But intrusive regulation has not helped one bit in restoring the sectors health.

The consistent lesson is that less government is better governance. This was PM Modi’s rallying principle. One only wishes that he would make someone, who has his ear, responsible for alerting him every time government departs from this golden rule.